In what comes as a shocking revelation for the Indian electric two-wheeler market, the stringent eligibility criteria for the much-anticipated FAME II scheme will see around 95 percent of the existing electric two wheelers missing the subsidy, according to a report by research house CRISIL.

On March 28, 2019, the Ministry of Heavy Industry and Public Enterprise issued a notification, which laid out the eligibility criteria for electric buses, passenger vehicles, three- and two-wheelers to avail of the FAME-II incentives. The criteria based on minimum top speed, minimum range per charge, minimum acceleration and energy consumption efficiency of electric vehicles (EVs). It has also mandated that all EVs except e-rickshaws and e-carts should have regenerative braking capability to be eligible for incentive.

Interestingly, the report found that around 90 percent of the vehicles that availed of incentives under the FAME I scheme, which was operational between April 1, 2015, and March 31, 2019, were electric scooters.

CRISIL’s assessment of the product portfolio of various EV manufacturers indicates that the electric two-wheeler segment would be impacted the most by FAME-II rules, estimating that more than 95 percent of the electric two-wheeler models being produced now won’t be eligible for incentive under FAME-II.

While the phase two of FAME scheme sees a jump in total allocation to Rs 10,000 crore (FAME I - Rs 895 crore) and seeks to offer incentives to 15,62,090 vehicles, including 10,00,000 electric two-wheelers, the benefits of incentives will be extended to only those vehicles that are fitted with an advanced battery, like a Lithium-Ion battery, and other new technology batteries. This is done in an effort to encourage advance technologies.

The CRISIL report observes that up until September 2018, around 90 percent of the beneficiaries under FAME-I were lead-acid powered electric scooters. Moreover, under FAME-I, incentive was provided to all battery powered vehicles including those that run on lead acid batteries.

The scooters with lead-acid batteries were priced below Rs 50,000 (after including the FAME-I incentive of around Rs 9,000), far cheaper than their lithium-ion battery-driven counterparts, which cost around Rs 70,000 after incentive. Thanks to their lower upfront cost and detachable batteries electric scooter sales in India doubled to nearly 55,000 units in fiscal 2018, according to Society of Manufacturers of Electric Vehicles data.

Apart from excluding lead-acid battery-powered two-wheelers, the latest eligibility criteria mandates that electric scooters ought to have a minimum range of 80km per charge and minimum top speed of 40kph, along with provisions on energy consumption efficiency, minimum acceleration and higher number of charging cycles. This further excludes more than 90 percent of the remaining lithium-ion battery-driven models from the subsidy, the report observed.

CRISIL says EV makers have been caught off-guard by the stringent eligibility criteria leaving them no time to conform. They are expected to increase the battery size of their offerings for higher range and speed, improve battery technology for more charging cycles and also install electric regenerative breaking technology in their two-wheelers in order to be eligible for the incentives.

Moreover, the requirement of 50 percent localisation in manufacturing is also expected to be a hurdle for many automakers, according to CRISIL. And going ahead, upgrading products would increase the costs for electric scooters, which could hurt demand. Electric two-wheeler makers are expected to take time to come up with new models eligible for FAME-II demand incentive along with the necessary level of ocalization. It would happen only after they make changes in production and exhaust inventory of vehicles that are not eligible for subsidy.

Electric two-wheeler incentives reduced

Earlier, the incentive for lithium-ion battery-based two-wheelers stood at Rs 17,000 or Rs 22,000, based on the fuel savings potential and irrespective of the size of the battery. With FAME-II linking the demand incentive to the size of the battery, the government is providing Rs 10,000 per kWh of battery used for a two-wheeler. The average size of a lithium-ion battery in electric scooters sold during FAME-I was around 1.5kWh (average subsidy of around Rs 15,000 per vehicle), which means the average subsidy per vehicle availed under FAME II will be reduced by Rs 2,000 to Rs 7,000.

CRISIL finds that the e-scooter industry would see turbulence in the initial phase of the FAME-II. In the near term, liquidating inventory would necessitate higher discounts to offset the lack of subsidy. EV makers would then concentrate on localisation and building supply chains alongside product development to come up with new models. They have also requested the government to re-consider the stringent norms, concludes the report.